What Is Taxable Income?
Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year. It is generally described as adjusted gross income (which is your total income, known as “gross income,” minus any deductions or exemptions allowed in that tax year). Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and unearned income.
- Taxable income is the amount of a person’s gross income that the government deems subject to taxes.
- Taxable income consists of both earned and unearned income.
- Taxable income is generally less than gross income, having been reduced by deductions and exemptions allowed by the IRS for the tax year.
Understanding Taxable Income
Unearned income considered taxable income can include canceled debts, alimony payments, child support, government benefits (such as unemployment benefits and disability payments), strike benefits, and lottery payments. Taxable income also includes earnings generated from appreciated assets that have been sold or capitalized during the year and from dividends and interest income.
The Internal Revenue Service (IRS) offers tax filers the option to claim the standard deduction or a list of itemized deductions. Itemized deductions include contributions to individual retirement accounts (IRAs), interest paid on mortgages, some medical expenses, and a range of other expenses. The standard deduction is a set amount tax filers can claim if they don’t have enough itemized deductions to claim. For 2019 individual tax filers can claim a $12,200 standard deduction ($24,400 for married filing jointly).1 These figures rise to $12,400 and $24,800 for 2020. However, that deduction is set to expire at the end of 2025.2
When businesses file their taxes, they do not report their revenue as income. Rather, they subtract their business expenses from their revenue to calculate their business income. Then, they subtract deductions to calculate their taxable income.
Businesses subtract their expenses from their revenue to determine business income, then take deductions to arrive at their taxable income.
Taxable Income vs. Nontaxable Income
The IRS considers almost every type of income taxable, but a small number of income streams are nontaxable.3 For example, if you are a member of a religious organization who has taken a vow of poverty, work for an organization run by that order, and turn your earnings over to the order, your income is nontaxable. Similarly, if you receive an employee achievement award, its value is not taxable as long as certain conditions are met. If someone dies and you receive a life insurance payment, that is nontaxable income as well.
Different tax agencies define taxable and nontaxable income differently. For example, while in the United States the IRS considers lottery winnings to be taxable income, the Canada Revenue Agency considers most lottery winnings and other unexpected one-time windfalls to be nontaxable.
This post have 0 Comments